1/09/2011

Keeping regressive taxes, scrapping progressive ones

David Cameron announced today that the regressive rise in VAT, which hits the poorest hardest will be kept, but the progressive 50% tax rate for high earners (something that was for many years a Lib Dem policy) will be scrapped as soon as possible.

What does it say about this government's priorities that taxes that hit the poorest worst will be kept but the rich will be given more money back ?

Alan, there was a piece on Radio 5 this morning about what you say, and the point was made that tax takes have risen when higher rate taxes have been cut, but higher rate taxes have only been cut in the past during times of healthy growth, so tax takes would have risen anyway.

Nich - I'll take Laffer and Wanniski (respected economists) over Radio 5 DJs anyday! The evidence that lower taxes generate growth is pretty solid: over the last 50 years, the most entrepreneurial countries tend to have the lowest taxes. They also tend to have the greatest inequalities.

But it all depends on the motivation for the tax. The left typically abhor inequality more than growth, and so the tax makes sense (better to live in a poorer, but more equal society). The right, typically accept inequality as a price for growth. Interesting that Labour only got elected recently when they too adopted this (Mandelson famously having no problem with the "filthy rich").

The LDs (not untypically) look both ways - the Orange Bookers being more Blairite, with the activists more Brownite. This is why the party is being torn apart.

Well duh. Its a Tory led government. That's what they do. That's why they take money from hard working families and force students into a lifetime of debt while giving cold weather payments to millionaires.

@Alan. Regressive taxes like VAT still involve a distortion of the market and therefore are detrimental to growth. The point is that for any given level of tax, however low, that it should be raised in a fair way.

The thing to bear in mind is, there`s no such thing as a neutral economist. As Alan points out, it`s partly a matter of intentions, views and values.

`Lower taxes stimulate growth` is probably something of a half-truth. Which taxes ? Growth in which areas ?

All economic measures have a plus and minus side according to your views - a strong pound damages exports, but makes imports more expensive. VAT puts prices up and damages retail, but direct taxes (income tax) may have the same effect.

I don`t like to say anything nice about politicians of any sort, but it must be said that UK exports of manufactured goods are doing well. In fact the firm that employs one of my neighbours is finding that in addition to benefitting their export drive (which they expected), the weaker pound has also depressed demand for imported goods, boosting their domestic sales (which they didn`t expect).

If we can keep all parties committed to that approach (and all three were committd to manufacturing and engineering until the `80s), then I for one will be very happy.

Apologies, I made an error in that previous posting. I meant to say that a strong pound damages exports but a weak pound makes imports more expensive.

Just to confuse the issue, of course the same company could be importing raw materials to make into finished products to export, so it`s very difficult to think in terms of hard and fast rules in these matters.